Mutual Funds With Low Minimums Can Put Investors Back on the Winning Path

[Editor’s Note: This is the first installment of a new series that will explore sound strategies for investing during the ongoing financial crisis.]

By William Patalon III
Executive Editor
Money Morning/The Money Map Report

Just this week, a friend told me that he wanted to jump-start his long-neglected saving-and-investing efforts, but was worried it wouldn’t be possible on his current household budget.

I’d be willing to bet that a lot of folks are asking that very same question right now.

I mean, let’s face it: Everyone knows how important it is to save money. But in the middle of what may well be the worst U.S. financial crisis since the Great Depression, finding the cash to create an emergency fund – or to invest in a mutual fund that requires a $10,000 initial outlay – can appear so daunting that many investors decide to not even bother.

Don’t that same mistake.

There’s an option: Mutual funds with a low initial investment threshold. We all know, for example, that Vanguard Wellington (VWELX) is a great fund – indeed, it’s a favorite of Money Morning Investment Director Keith Fitz-Gerald – but here in the depths of a financial crisis, not everyone has the $10,000 in cash needed to become a new shareholder.

The upshot: Unfortunately, a lot of folks stop right there, and don’t bother to jump-start their saving-and-investing program.

Don’t that same mistake.

When a Small Start is a Good Start

One way around is to seek mutual funds that allow investors to start with either a very small initial investment – or with no initial investment at all (provided you’re willing to let the fund company take $50 or $100 a month directly out of your checking or savings account).

This approach has a couple of advantages, Money Morning’s Fitz-Gerald says:

• First, it induces you to keep investing, even in a bad market, which history shows is a key element of better long-term results.
• Second, by taking advantage of the electronic-investing option many fund companies offer, you’re investing consistently – for instance, investing the same amount of money on the same day each month.
• Third, for the ultra-cautious the lower investment thresholds can serve as a de facto risk-management tool, since it means that you’re putting less money at risk in the market at a time when the market is uncertain (although, at the same time, you’re still investing).

“It’s a way to insure that you continue to invest, even when the markets stink,” Fitz-Gerald says. “If you are gun-shy, and don’t really want to put a lot of cash at risk, this is a good way to continue your forward-investing momentum, to continue even when the markets aren’t optimum.”
Where do you look for funds like this?

One good place to start your search is with Morningstar, the noted financial-products researcher. For some help, we turned to Morningstar.com’s handy mutual fund screener. And here’s what we did. We looked for funds with an initial purchase of $500 or less. Not wanting big chunks of our capital to for sales commissions, we set the “load” status to “No-Load Funds Only.” And we opted for low-expense offerings, meaning we screened for funds featuring expense ratios of 1.00% or less.

Wanting to cull this further – and to hopefully end up with the “best-in-breed” funds – we limited our search to funds that were rated as “five-star” products by Morningstar. Lastly, since we’re looking chiefly as equity funds in this exercise, we ran one screen for domestic stock funds and another for international stock funds.

We ended up with 23 funds in the domestic-stock category and 16 funds in the international stock category.

What this demonstrates is “that there are quality funds out there,” even for investors who have smaller amounts to invest, Fitz-Gerald says.

Morningstar’s mutual fund screening program – which is free – allows for investors to include other parameters, too, including those for risk, returns, portfolio turnover, and management tenure. We were attempting to keep it simple to show what’s possible, and also figured you’d want to do some of your own research to find funds that match your personal financial needs. The program can also screen for bond funds. One task it does not perform is to identify which of the funds are close to new investors.

Go Global or Get Left Behind

The Money Morning graphic shows the results of our search for International stock funds – and for a good reason. As regular readers of Money Morning know, we believe a global investing strategy is key to any investor’s long-term success. Unfortunately, too many investors de-emphasize the international or global elements of their portfolio, believing that domestic investments are less risky.

There are many different kinds of risk, however – including the risk of getting left behind. Long-term, most of the growth that’s expected in the decades to come will be outside U.S. borders.

If you want proof, just ask the World Bank.

• Today, the United States and Asia each account for 28% of the worldwide economy. Combined, that’s a total of 56%.
• Twenty-five years from now, America’s share of the global economic pie will have slipped to 24%. But Asia’s will have soared to 55%.

In short, in slightly more than two decades, Asia will be twice the economic powerhouse that the United States is today.
It’s true that a number of overseas markets have been problem-plagued in recent months. But that’s just a short-term problem. And as the World Bank statistics demonstrate, the long-term outlook for growth outside the U.S. borders is exceptionally strong.

By focusing only on U.S. stocks, you’ll be looking at only a quarter of the world’s investment opportunities. You’ll miss out on some of the world’s fastest-growing markets. And you’ll get left behind.

The greatest growth will come from China, India and the newly capitalist economies of Eastern and Southern Asia. There may be some other growth areas, such as resource-rich Latin America.

Famed Wharton Business School Professor Jeremy Siegel recently pronounced that the long-held conventional wisdom on international investing should be thrown out the window. For decades, we’ve heard over and over how international investments should comprise 5%, 10% or at most 15% of our portfolio’s total value. Any more than that is foolhardy and risky, we were programmed to believe.

According to Siegel, however, the truly foolhardy act is to limit our international exposure that much. In other words, the biggest risk U.S. investors now face isn’t just the possibility of losses incurred when some foreign market plunges. The real risk now is the possibility that U.S. investors face – getting left behind financially because of all the growth that’s expected to be generated beyond U.S. borders.

Investment advisors who stick with the old asset-allocation model are actually doing their clients a huge disservice, Siegel says.

Siegel now believes that international investments should comprise about 40% of your total holdings. Most individual investors know Siegel for his best-selling book, Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies. The book first came out in 1994, and is considered one of a handful of “must-read’ titles in investing finance. The new edition, which appeared in November 2007, includes a long addition addressing the international arena, and how investors must adapt their strategies to the new realities of globalization.

The nation’s wealthy already really understand what’s at stake and are already profiting from these trends – and in a big way. According to a 2007 study by the Spectrem Group, 40% of affluent U.S. households are continuing to invest internationally, while a full one-third are actually planning to invest more. Their chief country of choice when it comes to investing abroad: China.

Other Options

For cash-challenged investors who want to capitalize on China’s growth, there is a solid option – the China Region Opportunities Fund (USCOX), which is operated by the San Antonio, Texas-based U.S. Global Investors Inc. (GROW). As it does with most of its funds, U.S. Global offers interested China fund investors its trademarked “ABC Investment Plan,” which permits investors to make a $100 initial investment and subsequent monthly investments of $30 a month, so long as the new shareholder consents to an automated electronic transfer. You can even tell the company which day of the month you want the money to be invested.

A number of other companies offer similar programs, which are known in the industry as “automated investment plans,” or AIPs. One other company known for operating quality funds is the Baltimore-based T. Rowe Price Group Inc. (TROW), a firm I covered during my time as a business journalist. With most of its funds, the minimum initial investment is waived as long as you agree to have at least $50 a month per fund automatically transferred from your checking account and invested. That arrangement must be maintained until you reach the specified minimums to avoid any extraneous fees.

(One point worthy of note: When my wife and I bought our house nearly nine years ago, the down payment came from two T. Rowe Price funds that I’d built up over a couple of years solely through AIP investments).

Here’s a list of T. Rowe Price funds of all types that are ranked four and five stars by Morningstar.

One final note about low-initial investment funds: This is a great way to get you started back on the savings pathway. At some point, however, you’ll likely want to either add funds or boost your regular investment total to start amassing capital.

“One thing that investors too often don’t understand: You never want to stop investing altogether,” says Money Morning’s Fitz-Gerald. “Even if it’s only a couple of bucks here and there. History shows that those who continue to invest through thick and thin are those who generate the best returns.”

At least, however, this strategy is a great way to get you started back on the savings pathway. At some point, however, you’ll likely want to either add funds or boost your regular investment total to start amassing capital.

[Editor’s Note: This new Money Morning series, "Financial Crisis Investing," will focus on ways investors can either side-step the ongoing uncertainty – or even use it to their advantage – in order to land market-beating profits, or simply to rebuild the personal wealth that was eviscerated as part of the estimated $6 trillion in shareholder wealth that’s been lost. In an upcoming issue, look for a story about a strategy American households can employ to bounce back from the effects of the recession. Money Morning is also offering a new report that details the additional dangers posed by the ongoing bailout payouts and the stimulus outlays that are to follow. The report is free of charge, and details ways that readers can obtain a complimentary copy of The New York Times best seller, "Crash Proof," whose author predicted the housing bubble and the crash of financial-asset prices long before they happened. And according to him, there are additional financial landmines still out there, continuing to pose danger to uninformed investors. He details those dangers, and outlines strategies for avoiding them. To read our free report, and to find out more about this offer, please click here.]

News and Related Story Links:

• Money Morning Special Investment Research Report:
  Global Investing: Has Wall Street Rigged the Game?

• Money Morning Special Investment Research Report:
  International Investing: Why U.S. Investors are “Boxed Out” of Big Global Profits.

• JeremySiegel.com:
  Jeremy Siegel